19 Jan 2017

Three reasons big banks are safe for the next five years

Article Image: 
Randy Woodbury, Principal Global Fixed Income Portfolio Manager discusses why big banks are safe for the next five years
by Randy R. Woodbury, CFA , Portfolio Manager

If the headline above caused you to pause, rest assured you read it correctly. But you're right to ask why we would choose to make such a bold statement. 

Since the fallout from the Global Financial Crisis, it has become somewhat of a game among financial pundits to predict the next crash, crisis, or Lehman-like bank failure that will send systemic shockwaves around the world. In fact, false alarms have been set off by everyone from Soros to Gundlach and Bernanke to Greenspan, causing most investors to become numb to the rhetoric.

But what if these clarion calls should have been in the opposite direction?  
More specifically, that in the current environment, no developed-market Global Systemically Important Bank (G-SIB), or “big bank”, will default in the next five years. As bold as that proposition might seem, our confidence stems from the secular transformation of financials, driven by regulatory reform, which has defined the banking industry for almost a decade. And while the transformation is not yet complete, and capital structure investment opportunities remain, you may still question why we would dare make such a statement? And, more importantly, how could we possibly be right?  We thought you might ask that.

Here are the three reasons we believe big banks are safe for the next five years...

  • Reason #1: Bank fundamentals have vastly improved
  • Reason #2: Highly accommodative Central Bank policy
  • Reason #3: Regulators reluctant to pull the plug on a bank


Reason #1: Bank fundamentals have vastly improved >